Teed v. Thomas & Betts Power Solutions, L.L.C.
20 Wage & Hour Cas.2d (BNA) 726, 2013 WL 1197861, 711 F.3d 763 (2013)
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Rule of Law:
The federal common law standard of successor liability applies to claims under the Fair Labor Standards Act (FLSA), meaning a company that purchases the assets of another may be held liable for the seller's FLSA violations when there is sufficient continuity of business operations and the successor had notice of the potential liability.
Facts:
- JT Packard & Associates (Packard) provided maintenance and emergency technical services.
- S.R. Bray Corp. (Bray) acquired all of Packard's stock, but Packard continued to operate as a stand-alone entity.
- Employees of Packard alleged that the company had violated their rights under the Fair Labor Standards Act (FLSA).
- Packard's parent company, Bray, defaulted on a $60 million secured bank loan which Packard had guaranteed.
- To satisfy the debt, Bray's assets, including its ownership of Packard, were placed into a receivership and auctioned off.
- Thomas & Betts Power Solutions, LLC (Thomas & Betts) was the high bidder, paying approximately $22 million for Packard's assets.
- The purchase agreement explicitly stated the asset transfer was to be 'free and clear of all Liabilities' and that Thomas & Betts would not assume liability for the pending FLSA litigation.
- After the acquisition, Thomas & Betts continued to operate the Packard business under the same name and employed most of Packard's existing employees.
Procedural Posture:
- Employees of JT Packard & Associates filed a collective action in federal district court against Packard and its parent company, S.R. Bray Corp., for violations of the Fair Labor Standards Act.
- Following the sale of Packard's assets, the plaintiffs filed a motion to substitute the buyer, Thomas & Betts Power Solutions, LLC, as the defendant.
- The district court granted the plaintiffs' motion, finding Thomas & Betts subject to successor liability.
- The parties entered into a conditional settlement agreement for approximately $500,000, contingent upon the outcome of an appeal on the successor liability issue.
- Thomas & Betts appealed the district court's final judgment to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does the federal common law doctrine of successor liability apply to claims under the Fair Labor Standards Act (FLSA) to hold a buyer of a company's assets liable for the seller's FLSA violations, even when the buyer expressly disclaimed such liability in the purchase agreement?
Opinions:
Majority - Posner, Circuit Judge
Yes, the federal common law doctrine of successor liability applies to claims under the Fair Labor Standards Act. The court held that where a successor company continues the business operations of its predecessor with knowledge of pending litigation, it can be held liable for the predecessor's FLSA violations to protect workers' rights, even if it expressly disclaimed liability. The court reasoned that federal employment statutes, including the FLSA, share a common purpose of protecting workers, which justifies a uniform, pro-plaintiff federal standard for successor liability over differing state laws. This standard prevents employers from using asset sales to evade their legal obligations. In the absence of successor liability, a violator could simply sell its assets and dissolve, leaving employees with no remedy. The court reframed the traditional multifactor test into a default rule: successor liability is appropriate unless there are good reasons to withhold it, such as lack of notice. Here, Thomas & Betts had notice of the FLSA claims, there was substantial continuity in the business operation, and the predecessor was unable to provide relief after the sale, making imposition of liability proper.
Analysis:
This decision formally extends the federal common law standard of successor liability to Fair Labor Standards Act claims within the Seventh Circuit, aligning it with other federal circuits. The ruling strengthens employee protections by ensuring that a change in corporate ownership through an asset sale does not automatically extinguish valid wage claims. Judge Posner's characterization of the standard as a default rule in favor of liability, rebuttable only by 'good reasons,' simplifies the analysis and shifts the burden to the acquiring company. This precedent makes it more difficult for employers to use insolvency proceedings or carefully worded purchase agreements to shield themselves from responsibility for labor law violations.
